Riding The Stock Waves: Technical Update On JPMorgan

Summary

• JPM has strongly outpaced the advance in the S&P 500 in 2021.
• Banks have benefitted from two rounds of massive stimulus.
• The temporary ease on Supplementary Leverage Ratio is set to expire, creating potential near-term uncertainty.
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Written by Jason Appel

U.S. bank stocks are off to a roaring 2021, and JPMorgan Chase (JPM), to which this article’s analysis pertains, is no exception. As of the market close, Tuesday, April 6, shares in JPM are up 20.04% year-to-date, strongly outperforming both the XLF (of which JPM comprises 11.98%) and S&P 500, which are up year-to-date: 17.61% and 8.46%, respectively.

JPM, like other financial sectors - and in particular, bank stocks - has reaped the benefits of two rounds of massive fiscal stimulus. The most recent earnings release from January states that, in the fourth quarter of 2020, JPM reported a 35% firm-wide increase in average deposits. Also, from the same release, Q4 earnings were $12.1 billion, up 42% from Q4 2019. Certainly, the bank was not impervious to economic impacts attributable to COVID-19, which has created a large expectation of decrease in loan performance, but as Lyn Alden Schwartzer has commented: ”Unlike 2008, the US banking system was well capitalized going into this recession, with a high allocation to cash and Treasuries.”

However, the Fed has announced that as of March 31, 2021, the temporary exclusion of treasuries from the supplementary leverage ratio - SLR - will expire. In 2020, banks were allowed to exclude treasuries from their SLR with hopes this would help stabilize the treasury market by eliminating the incentive for banks to dump their treasury holdings for cash in order to preserve a higher ratio of Tier 1 Capital. This restoration of pre-COVID capital requirements creates some shorter-term uncertainty as to how banks may respond to this apparently unwelcome development.

For very large banks, such as JPM, the SLR requirement is 5% and, as of the most recent earnings release, JPM reported a 6.9% SLR. Keep in mind the 6.9% that is quoted is based on the “eased” calculation which is set to expire on March 31.

From a technical perspective, JPM is in the latter stages of the rally cycle that commenced from the March 2009 low. The pattern of the rally is in the formation of what's referred to in Elliott Wave as an ending diagonal. These are five-wave trending patterns that tend to contain higher incidence of overlap among the individual waves, typically characterized by sizable intra-trend retracements. While they do take a clear direction, much of the price action indicates a higher level of market ambivalence than is indicated by the resoluteness of an impulsive wave. Lastly, a diagonal is characterized by three-wave movements that compose each of the larger degree primary five waves.

Price completed the Primary wave 4 of the Cycle pattern off the 2009 low at the March 2020 lows. Since then, JPM rallied 110% from trough, which was March 19, 2020, to peak, which was March 18, 2021. As is characteristic of diagonals, this rally has formed a clear three wave pattern, labeled (A) and composed of A-B-C on the accompanying chart. Furthermore, the final portion of (A), which is labeled C, has a very complete pattern to fill out its internal structure. (B) wave corrections are regarded as quite variable in terms of path, timing, and depth and so we lack a high confidence forecast in the shorter term. However, given the corrective nature of (B) waves, the prospects of either a sizable pullback or a protracted price consolidation are reasonably likely. In both cases, JPM is quite likely to underperform the broader index, S&P 500 in the near term. Our initial indication of potential top in place for (A) is a break below $146. Until then, price can reasonably get some small near-term extensions higher.

Fibonacci support sits between $102.15 and $121.73. We're not issuing a strong forecast that price will target this range in the near term, but should price correct to support, those who are bullishly inclined could view it as a buying opportunity. Please bear in mind though that we do not see JPM as a long-term hold as the subsequent move following this current expected (B) wave, i.e.: the (C) wave up, is expected to complete the cycle from the 2009 low, at which point we don’t see any highly likely path to sustained upside. Our forecast is that so long as JPM is able to maintain above $90, $184-$220 is expected in the coming years, with the outside potential to extend up to $290. Clearly, from current levels, this does not represent favorable risk-to-reward.

JPM Weekly

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.